Cost Accounting
Chapter 1 Click to edit Master subtitle style Introduction to cost accounting
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COST ACCOUNTING MANUFACTURING COST CONCEPT
ALL BUSINESS ENTITIES REQUIRES COST INFORMATION. MANUFACTURING PROCESS
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USES OF COST ACCOUNTING DATA
DETERMINING PRODUCT COST AND PRICING PLANNING AND CONTROL
ASSIGNING RESPONSIBILITY PERIODICALLY MEASURING AND COMPARING RESULTS TAKING NECESSARY CORRECTIVE ACTION
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Deal With Firms Which Are Manufacturers A Manufacturing A/C Is Prepared In Addition To The Trading And Income Statement Accounts
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Comparing Merchandising and Manufacturing Activities
Merchandisers . . Manufacturers . . . .
Buy finished goods.
MegaLoMart Sell finished goods.
Buy raw materials. Produce and sell finished goods.
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Manufacturing Cost Concepts
Financial Accounting
Cost is a measure of resources used or given up to achieve a stated purpose.
Managerial Accounting
Product costs are the costs a company assigns to units produced.
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Comparing Financial Accounting and Management Accounting
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MANAGERIAL COST CONCEPTS
Manufacturing consists of activities and processes that convert raw materials into finished goods.
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Direct Costs and Indirect Costs
Direct costs
Indirect costs
Costs that can be easily and conveniently traced to a unit of product or other cost objective. Examples:
Costs cannot be easily and conveniently traced to a unit of product or other cost object. Example: Manufacturing overhead
Direct material Direct labor
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Manufacturing costs
Manufacturing costs are usually classified as follows: 1. Direct materials, 2. Direct labor, and 3. Manufacturing overhead.
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Manufacturing Costs
Direct Materials Direct Labor Manufact uring Overhead
The Product
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Direct Materials
Raw materials are the basic materials and parts that are to beused in the manufacturing process. Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials.
Example: A radio installed in an automobile
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Direct Labor
Direct labor is the work of factory employees that can be physically and directly associated with converting raw materials into finished goods.
Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workers
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Manufacturing/Factory Overheads
Manufacturing costs that cannot be traced directly to specific units produced. Manufacturing/factory overhead consists of costs that are indirectly associated with the manufacture of the finished product.
Examples: Indirect labor and indirect materials Wages paid to employees who are not directly involved in production work. Materials used to support the production process.
Examples: lubricants and cleaning supplies used in the automobile assembly plant.
Examples: maintenance workers, janitors and security guards.
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Overhead
Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product. These costs may also be manufacturing costs that cannot be classified as direct materials or direct labor. Manufacturing overhead includes 1 indirect materials; 2 indirect labor; 3 depreciation on factory buildings and machines 4 insurance, taxes, and maintenance on factory facilities.
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COST OF GOODS SOLD COMPONENTS
Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section.
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ILLUSTRATION COST OF GOODS SOLD COMPONENTS
Merchandiser Beginning Merchandise Inventory
Cost of Goods Purchased Manufacturer
Ending Merchandise Inventory
=
Cost of Goods Sold
Beginning Finished Goods Inventory
Cost of Goods Manufactured
Ending Finished Goods Inventory
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Nonmanufacturing Costs
Administration / Operating costs Marketing and selling costs
a)
a)
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ADMINISTRATION EXPENSES
l All executive, organizational, and clerical costs. l Examples: - managers salaries - legal and accountancy charges - depreciation of accounting machinery & secretarial salaries
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SELLING AND DISTRIBUTION EXPENSES
get Costs necessary to the order and deliver the product. Examples: - Sales staffs - Salaries & - Carriage outwards - Depreciation of delivery vans - Advertising
commission
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PRODUCT COSTS
Costs that are a necessary and integral part of producing the finished product. include each of the manufacturing cost elements (direct materials, direct labor, and manufacturing overhead)
These costs are not expensed to cost of goods sold under the matching principle until the
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finished goods inventory is sold.
PRODUCT COSTS (Cont)
Direct materials and direct labor are often referred to as prime costs due to their direct association with the manufacturing of the finished product. Direct labor and manufacturing overhead are often referred to as conversion costs since they are incurred in converting raw materials into finished goods.
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Classifications of Costs
Manufacturing costs are often combined as follows:
Direct Materials Direct Labor Manufacturing Overhead
Prime Cost
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Conversion Cost
PERIOD COSTS
a) are identifiable with a specific time period, b) relates to nonmanufacturing non-inventoriable costs, and c) include selling and administrative expenses.
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ILLUSTRATION: PRODUCT VERSUS PERIOD COSTS
Product Costs
Manufacturing Costs
Direct Labor Manufacturing Overhead Period Costs
Nonmanufacturing Costs
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Selling Expenses Administrative Expenses
{ {
Direct Materials
Prime Costs Conversion Costs
Flow of cost associated with production
Material inventory
DM purchase d
DM used
WIP inventory
Cost of finished goods
Finished goods INV
Product is sold
COG S
DL used
MOH used
DL payable
MOH
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VARIABLE FACTORY OVERHEADS
Supplies Fuel Power Small tools Spoilage, salvage and reclamation expenses Receiving costs Hauling within plant Royalties Communication costs
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FIXED FACTORY OVERHEADS
Salaries of production executives Depreciation Property tax Patent amortization Wages of security guards and fire fighters Maintenance and repairs of building and grounds
Insurance- property and liability 5/6/12
SEMI VARIABLE FACTORY OVERHEADS
Supervision Inspection Payroll department services Personnel department services Factory office services Materials and inventory services Cost department services Maintenance and repairs of machinery and equipment Compensation insurance Health and accident insurance
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Controllable and Uncontrollable costs
Controllable costs:
Costs that can be controlled or heavily influenced by the manager.
Uncontrollable costs:
Costs that a manager cannot influence significantly.
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Manufacturing operations and Manufacturing Costs
Job Shop:
Low production volume; little standardization; one of a kind product.
Batch:
Multiple products; low volume
Assembly line:
A few major products; higher volume. Mass customization: Higher production volume; many standardized components ; customized components of components.
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More cost classifications
Opportunity costs:
Is defined as a benefit that is sacrificed when the choice of one action preludes taking an alternative course of action.
Out of pocket costs:
Costs that require payment of cash or other assets as a result of their incurrence.
Sunk costs:
Costs that have been incurred in the past. They do not affect future costs and cannot be changed by any current or future action. Irrelevant to all future decisions.
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Differential costs:
More cost classifications
It is the amount by which the cost differs under two alternative actions.
Incremental costs:
The increase in cost from one alternative to another.
Marginal costs:
Additional costs incurred when an additional unit is produced.
Average costs:
It is the total cost for whatever quantity is manufactured, divided by the number of units
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Standard costs:
Pre determined costs for direct materials, direct labor and factory overhead. They are established by using information accumulated from past experience and data secured from research studies.
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